Is opposition to Uber’s surge pricing irrational?

Everyone says it is. Here, for example, is a representative statement from Ilya Somin. The argument is just that unregulated markets are efficient and therefore price caps are inefficient. Somin concludes that everyone opposed to surge pricing is irrational or ignorant.

I don’t oppose surge pricing but I don’t think Somin is right.

1. Although a practice may be efficient, it doesn’t follow that everyone is made better off by it. People rationally oppose surge pricing as long as they value the dollar savings resulting from a price cap more than the extra time they spend waiting for an Uber car or taxi to show up. These people oppose an efficient practice that happens to harm them. What’s so irrational about that? In fact, the contrary view would be irrational.

2. When surge pricing comes into effect, there is an undersupply of cars. This means that Uber has market power. Taxis can’t raise their prices, and Lyft apparently won’t match Uber’s price above a threshold. This means that for the class of people who will pay the surge price, there is no meaningful competition. It doesn’t take much imagination to believe that Uber–which takes infantile pride in its ruthlessness–will charge a price that eats up as much of the consumer surplus as possible, in the process pricing some passengers out of the market.

This is not an argument for banning surge pricing or even regulating it. It’s possible that Uber’s monopoly profits will bring in additional competition, or that the threat of additional competition keeps Uber in line, and that’s what we usually assume in antitrust law, so we let the Ubers of the world charge supracompetitive prices except in egregious circumstances. But people’s efforts to shame Uber into lowering its surge prices may not only be in their self-interest; they may serve social welfare as well.

3. Everyone thinks of Uber as an app that allows drivers and passengers to match. But also think of Uber as an efficient way of cartelizing drivers and obtaining and analyzing the data of passengers so as to maximize revenues. (Can Uber determine your price sensitivity based on past trips? Probably. Does it exploit that information by varying prices by passenger type? Maybe not. Yet.) True, Uber is a better cartel than the taxis. True also, many Uber drivers did not offer services before Uber organized them. But not everything Uber does is by definition a good thing.